“Global Financial Crisis 2007-2012

Topics: Subprime mortgage crisis, Monetary policy, Financial crisis of 2007–2010 Pages: 24 (7984 words) Published: March 10, 2014


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“Global Financial Crisis 2007-2012”

Introduction

Global Financial Crisis 2007--2012 also known as the Global Financial Crisis (GFC), is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. A ripple effect around the world is resulted due to the collapse of the US sub-prime mortgage market and the reversal of industrialized economies which further, affects the global financial system. Within the short span of time, GDP growth falls, and the manufacturing sector has gone into a tailspin; the best-known Indian firms are making losses and cancelling planned investments; the share market has crashed; foreign acquisitions proved to be a burden on many corporate firms. The Indian economy has started facing a downfall from a historically developed domestic demand. Due to the increased inflows of foreign capital for its growth, it has proved to be systemically weak and in danger. In 1990-91, the flow of foreign capital dried up. In order to get fresh loans it was forced to undergo IMF-directed ‘structural adjustment’. A flood of foreign speculative capital entered India through various routes, with net capital inflows rising to a peak of $108 billion in 2007-08. These inflows resulted in a steep rise in bank lending to middle and upper class consumers for houses and automobiles. The crisis resulted from a combination of complex factors, including easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. One narrative describing the causes of the crisis begins with the significant increase in savings available for investment during the 2000–2007 periods when the global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant Pool of Money" increased as savings from high-growth developing nations entered global capital markets. Investors searching for higher yields than those offered by U.S. Treasury bonds sought alternatives globally. The temptation offered by such readily available savings overwhelmed the policy and regulatory control mechanisms in country after country, as lenders and borrowers put these savings to use, generating bubble after bubble across the globe. While these bubbles have burst, causing asset prices to decline, the liabilities owed to global investors remain at full price, generating questions regarding the solvency of consumers, governments and banking systems. Struggling banks in the U.S. and Europe cut back lend causing a credit crunch. Consumers and some governments were no longer able to borrow and spend at pre-crisis levels. Businesses also cut back their investments as demand faltered and reduced their workforces. Higher unemployment due to the recession made it more difficult for consumers and countries to honor their obligations. This caused financial institution losses to surge, deepening the credit crunch, thereby creating an adverse feedback loop. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with...
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